Page 85 - Annual Report 2022

23 Banka Kombëtare Tregtare Annual Report 2022

Banka Kombëtare Tregtare Sh.a.
Notes to the Consolidated Financial Statements for the year ended
31 December 2022 (Amounts in USD, unless otherwise stated)

4. Use of estimates and judgements
Management discusses with the Audit Committee the development, selection and disclosure of the Bank’s critical accounting
policies and estimates, and the application of these policies and estimates.
These disclosures supplement the commentary on financial risk management (see note 5).
The following are the critical judgements, apart from those involving estimations (which are dealt with separately below), that the
management has made in the process of applying the Group’s accounting policies and that have the most significant effect on
the amounts recognised in financial statements:
Business model assessment: Classification and measurement of financial assets depends on the results of the SPPI and the
business model test (note 3, (g), (iii)). The Group determines the business model at a level that reflects how groups of financial
assets are managed together to achieve a particular business objective. This assessment includes judgement reflecting all
relevant evidence including how the performance of the assets is evaluated and their performance measured, the risks that affect
the performance of the assets and how these are managed and how the managers of the assets are compensated. The Group
monitors financial assets measured at amortised cost or fair value through other comprehensive income that are derecognised
prior to their maturity to understand the reason for their disposal and whether the reasons are consistent with the objective of the
business for which the asset was held. Monitoring is part of the Group’s continuous assessment of whether the business model
for which the remaining financial assets are held continues to be appropriate and if it is not appropriate whether there has been
a change in business model and so a prospective change to the classification of those assets.
ECL Determination

Significant increase of credit risk: As explained in note 3 (g) (ix) and 5 (b) (ii), ECL are measured as an allowance equal to 12-month
ECL for stage 1 assets, or lifetime ECL assets for stage 2 or stage 3 assets. An asset moves to stage 2 when its credit risk has
increased significantly since initial recognition. IFRS 9 does not define what constitutes a significant increase in credit risk. In
assessing whether the credit risk of an asset has significantly increased the Group takes into account qualitative and quantitative
reasonable and supportable forward looking information. Refer to note 3 (g) (ix) and 5 (b) (ii), for more details.
Establishing groups of assets with similar credit risk characteristics: When ECLs are measured on a collective basis, the
financial instruments are grouped on the basis of shared risk characteristics. Refer to note 3 (g) (ix) and 5 (b) (ii), for details
of the characteristics considered in this judgement. The Group monitors the appropriateness of the credit risk characteristics
on an ongoing basis to assess whether they continue to be similar. This is required in order to ensure that should credit risk
characteristics change there is appropriate re-segmentation of the assets. This may result in new portfolios being created or
assets moving to an existing portfolio that better reflects the similar credit risk characteristics of that group of assets. Re-
segmentation of portfolios and movement between portfolios is more common when there is a significant increase in credit risk
(or when that significant increase reverses) and so assets move from 12-month to lifetime ECLs, or vice versa but it can also
occur within portfolios that continue to be measured on the same basis of 12-month or lifetime ECLs but the amount of ECL
changes because the credit risk of the portfolios differ.

Models and assumptions used: The Group uses various models and assumptions in measuring fair value of financial assets as
well as in estimating ECL. Judgement is applied in identifying the most appropriate model for each type of asset, as well as for
determining the assumptions used in these models, including assumptions that relate to key drivers of credit risk. See note 3 (g)
(ix) and 5 (b) (ii), for more details on ECL and note 3 (g) (viii) for more details on fair value measurement.